WEEK 12: IS MORE FOREIGN AID THE ANSWER? Fall-2007

WEEK 12: IS MORE FOREIGN AID THE ANSWER? Fall-2007 Richard H. Bernsten Agricultural Economics Michigan State University 1 I. Development Assistance Photo A. What is Foreign Aid Def: Private & public resource transfers ($) from DCs to LDCs B. Why Do DCs & Organizations Give Foreign Aid? o Promote economic development (e.g., education, health) o Support their security, military, political & strategic interests o Dispose of surplus grain/sell other products o Encourage human rights, economics policy& democratic reforms o Respond to humanitarian disasters (tsunamis, famines, earthquakes) oother? 2 1

C. Who Provides Foreign Aid & Why? 1. Public sources: "Official Development Assistance" (ODA) Note: ODA only includes $ that goes to poor LDCs for development & humanitarian assistance o Major multilateral donors ($ from DCs to LDCs via an international organization) UN Agencies--FAO, WFP, UNDP, IFAD, WHO, UNICEF Non-UN Agencies--WB & IMF (big!), Euro.Development Fund Regional Dev.Banks--Asian, African, Inter-Amer.Dev. Bank Why? to promote development & economic reforms o Major bilateral donors ($ from a DC to a LDCs & NGOs in LDCs) Western DCs (especially to former colonies) OPEC countries (especially to Arab world) Japan (especially to Asia) Why? Promote security, economic/political reforms, dispose of agricultural surpluses (i.e., US) 3 2. Private sources ($ from orgs. & individuals to IOs, LDCs & NGOs) o Foundations: Rockefeller, Ford, Kellogg o Churches: World Council of Churches, individual denominations o NGOs: Oxfam, CARE, CRS, Save the Children, Doctors Without Borders, World Vision, etc. o Private philanthropy some recent examples Gates donates more $ for world health (AIDS, TB, malaria) that U.S. govt.! Buffett $30.7 billion via Gates Foundation Turner in late 1990s, gave $34 billion to pay US s UN debt, $1 billion to UN humanitarian programs. Soros gives $ to private institution in 27 former communist countries to strengthen civic society Why? Promote humanitarian concerns, development 4 2

3. US Resource Flows to Developing World ($70.5 billion, 2000) (Fig.) A broader concept of foreign aid (USAID new idea!) o Foreign direct investment (FDI):. 39% o Personal remittances (esp, to Mexico, Brazil):... 25% o ODA (Part I, poor LDCs, & Part II, other countries): 18% o Religious organizations: 5% o NGOs/PVOs:. 5% o Corporations/corporate foundations:. 4% o University/college scholarships:... 2% o Foundations:.... 2% Should these all be called foreign aid? 4. Worldwide Resource Flows (2003) FDI=$301 billion, Remittances=$126 billion, Bilateral Aid=$68 billion WB-$20 billion, NGOs=$5 billion D. Is Foreign Aid (ODA) a gift? o Loans--made at commercial or subsidized interest rates WB & IMF primarily make loans which must be repaid o Grants--no repayment required, bilateral aid is mostly grants 5 II. UN Millennium Development Goals They are a blueprint--agreed to by all of the world s countries & leading development institutions for meet the needs of the world s poorest What are the goals? o Eradicate extreme poverty & hunger o Achieve universal primary education o Promote gender equality & empower women o Reduce child mortality o Improve maternal health o Combat HIV/AIDS, malaria & other diseases o Ensure environmental sustainability o Development a global partnership for development What s needed to achieve them? o Developing countries a commitment ( political will ) to political, economic & social reforms o Developed countries an increase in foreign aid & trade reforms 6 3

III. US Foreign Aid Spending ($20.7 billion, 2004) Table, pie) A. Military Assistance ($3.4 billion, 23%) o Mostly to Israel, Middle East countries) B. Economic/Political Security Assistance ($5.4 billion, 26%) o Supports for US security interests o Goal--assist "friendly" governments facing a crisis/threat o Provides $ for country to import goods, pay foreign debts Examples--Aid to Vietnam (formerly), Israel, Egypt, Afghanistan C. Bilateral Development Aid ($6.2 billion, 30%) Types of Activities Supported o Projects designed to strengthen/build agricultural research, family planning, road, health services, universities, environment Typical Project Components o Technical assistance--pays salaries for "experts" to teach, plan & manage projects o Training--scholarships to study in US (Fulbright program) o Commodities buildings, vehicles, equipment 7 Example--USAID/MSU/U. Zim. Faculty Expansion Project o US faculty go UZ to teach, supervise research o Zimbabwe faculty to U.S. for MS/PhD study o Purchased equipment for UZ (computers, labs) D. Humanitarian/Disaster Relief Assistance ($2.6 billion, 12%) o Assistance to people affected by tsunamis, earthquakes, drought o Food Aid--LDC typically pays for food with local currency E. Multilateral Development ($1.7 billion, 8%) US government transfers $ to international agencies (FAO, WHO, UNDP, UNAIDS, regional banks, etc.) A. Foreign Aid-Related Expenditures Not Considered ODA) o Military Aid--addresses US security concerns o Drug suppression--reduces flow of drug to the US o Debt forgiveness--reduces LDC s debt burden o Subsidies to US exporters--provides subsidies & repayment guarantees to promote US exports o State Department supports diplomatic relationships abroad o Peace Corps supports humanitarian projects 8 4

IV. History of U.S. Foreign Aid Program Overview o Aid given throughout US history Note: Ben Franklin, earliest example, offered to send sons to college after Iroquois signed a treaty with the US government o Formalized & expanded since WW II o Has focused on promoting the national interest (US foreign policy objectives) A. Early AID Programs 1. Lend-Lease (1941-45): provided military support to European allies 2. Marshall Plan (1948-52): provided funds to rehabilitate Europe 3. Mutual Security Act (1951): provided military aid to support security interests in Europe/Asia (Korean war, cold war) 9 B. Foundations For Current AID Program 1. Roosevelt sought to build a more liberal political & economic order o Build international orgs./un to insure world peace & stability 2. Truman emphasized technical assistance o Give LDCs access to science & technology 3. Kennedy (1960) prosperous world is a more secure world o Increase economic growth (not development) via industrialization o Assumed benefits would "trickle down" to the poor 4. Johnson (1963) aid to SE Asia, driven by the Vietnam War 5. Nixon (1968)--help the poorest of the poor o Focused on supporting agricultural, nutrition, population, health, education projects (build land grant universities in LDCs) that were very expensive 10 5

6. Reagan (1980)--need to focus resources on more cost-effective and strategic projects o Promoted policy reforms, Washington Consensus 7. Bush I (1988)--LDC s policies discourage development, so o Link aid to economic policy, human rights & democratic reforms o Strengthen the private sector & work with NGOs o Promote sustainable development (more $ for population, environment) 8. Clinton (1992): sustainable development o Focused on economic growth & agricultural development; population, health & nutrition; environment; democracy & governance; education & training; humanitarian assistance 11 C. USAID s Current (Bush II) Bilateral Program ($8.2 billion, 2004) (Excluding $18 billion for Iraq) 1. Three Pillars (http://www.usaid.gov) (Table) o Economic Growth, Agriculture &Trade (54%) Focus: a) interdependence of economic growth & agricultural development, b) sustainability, c) human capital to create viable market economies o Democracy, Conflict, &Humanitarian Assistance (15%) Focus: a) promote peaceful resolution of conflict, b) citizen participation & growth of democracies, c) respond to manmade/natural disasters including food aid o Global Health (31%) Focus: a) maternal & child health, nutrition, women s reproductive health, b) HIV/AIDS, c) infectious diseases Now: Agriculture, Democracy & Governance, Economic Growth & Trade, Environment, Education & Training, Global Health, Global 12 Partnerships 6

2. Regional Distribution excl. Iraq ($8.2 billion, 2004) (Figure) o Middle East (38.4%) Israel=US$ 2.6 billion Egypt=US$ 1.37 million o Africa (18.3%) o South Asia (17.3%) o Europe (inc. Russia & NIS) (11.4%) o Latin America & Caribbean (11.4%) o East Asia (3.1%) 3. Recent Trends in U.S. ODA o Increase in bilateral aid (2001=$5.9 billion, 2004=8.2 billion) o More aid for new initiatives Global AIDS Initiative Millennium Challenge Account o More aid to Africa (health) and global war on terrorism partners o More aid to Afghanistan & Iraq o Less aid to Europe 13 V. Is Foreign Aid a Success or a Failure? A. Many accomplishments: o Major improvements in LDCs--infant mortality; life expectancy, literacy, health services, school enrollment o Many successful projects: Examples Infrastructure--roads, dams, universities Health--smallpox, oral rehydration, AIDS, family planning Agriculture--research, famine early warning, new crop varieties But hard to measure foreign aids impact on economic development o AID has multiple objectives (security more than development!) o o Problems facing LDCs are great, $ for foreign aid is very small Note: Total ODA DCs gave to LDCs (2002) was about $10/capita ($56 billion) (Map) Many years are require to see the impact of a project o Hard to sort out "other" factors (e.g., weather, conflicts) 14 7

B. What are Major Criticisms of Foreign Aid? o We can t afford to aid to LDCs--should 1 st address unmet US needs But AID is only a small part (0.9%) of the US Federal budget (Figure) o AID goes to corrupt leaders in LDCs Aid has been and still is given for political/security reasons Reforms have been made to increase accountability/reduce corruption (e.g., Millennium Challenge Account, new WB policies to combat corruption) o AID benefits rich people in LDCs, not the poor Aid is now being redirected to: Preserve the environment, promote health &nutrition Support free market economic reforms, promote democracy 15 o AID doesn t help the US Most aid $ are actually spent in the US (80%) US benefits, if foreign aid helps LDCs to develop: Creates new export markets for US firms Exports created jobs for Americans Reduces illegal immigration from poor LDCs Reduces environmental spillover Reduces threat/spread of human/crop diseases Other? US benefits if foreign aid prevent failed states (e.g. states that harbor terrorists, drug traffickers, spark humanitarian disasters, undermine the global economy) C. What Lessons Have we Learned for Making Foreign Aid More Effective in Promoting Development? o Aid s impact is greatest, if LDC s policies support free market, exports, private enterprise, democracy o Investments in human capital (people), institutions & infrastructure are the key catalysis of economic development 16 8

VI. Future of Foreign Aid A. United States 1. 2000 Opinion Poll Most Americans supported foreign aid, but thought US spent too much (20% of federal budget)--10% was preferred! 2. Post 9/11 has increased Congress s support for foreign aid (Cartoon) o Millennium Challenge Account (a new Bush initiative) Commits US to increase aid by US$5 billion over current level (2006) Aid will target LDCs that show strong commitment to good governance/fighting corruption, improving health/education & pursuing economic policies that foster enterprise o HIV/AIDS--$15 billion over next 5 years o But aid will still be driven by national security issues (terrorism, oil)? Winners: Iraq, Afghanistan, oil exporters? Losers: human rights, non-frontline nations 17 3. McPherson s Proposal (USAID Director under Reagan) o Has lead a new initiative-- Partnership to End Hunger in Africa o Proposes the US focus Aid on improving agriculture & rural development in Africa (Decline in Ag AID) B. World Bank s (Pres. Wolfson) Challenge to DCs 1. Increase ODA from DCs by US$ 10 billion/year for 5 years (ODA has declined since 1992) 2. Reduce agricultural subsidies (now US$ 350 billion, 7 time ODA) 3. Open markets to goods produced in LDC 4. Increase debt relief for the poorest LDCs (primarily in Africa) C. NGOs (Bono) Community s Concerns 1. Now recognizes that relief efforts don t address the causes of a disaster must refocus on the root causes 2. Are pressing rich & powerful /govts. & int. orgs. to increase aid to Africa, provide more debt relief & reduce agricultural subsidies 3. Must NOT use humanitarian agencies to promote military objectives 4. Must find a way to keep DCs engaged not just for tsunami s 5. W.B. must continue to promote poverty reduction, not US policy goals 18 9

D. African Leaders (Who will save Africa?) 1. Now realizing African countries will prosper or collapse together, must take greater responsibility for solving Africa s problems 2. Several recent promising developments (e.g. Pan African Parliament, African Standby Force, East African Community, African Court on Human & People s Rights) 3. New Partnership for African Development (NEPAD) o Will implement peer review: democracy, good governance, human rights, gender equality, development policies o Hope to reverse the decline in Aid to Africa (Figure) o Requested additional US$ 64 billion/year in aid/debt reduction E. Private capital flows--replacing Aid as source of development $ But o Net private investment in 1996 was 16 time greater than ODA, but declined in the late-1990s(mainly invested in 29 countries (Figure) 2. Africa still needs Aid--little private capital flows to Africa, due to small markets, poor infrastructure, untrained labor force, political 19 instability (Figure) VII. Conclusion Aid isn't THE ANSWER to development, but it s an important PART of the solution LDCs need to help themselves: o Implement political reforms to increase accountability o Implement economic reforms to promote growth &increase foreign investment o Slow population growth to more resources available for development o Invest in education/training/health to increase productivity o Invest in agricultural research to increase food production o Other? DCs need to help LDC's achieve these goals by: o Providing additional foreign aid--global cooperation is the only way to solve world s critical problems, reduce poverty o Supporting trade reforms, so LDCs can sell exports in DCs o Recognizing cost-effectiveness & importance of aid o Other? 20 10

VIII. Myths About U.S. Foreign AID Myth #1: AID Goes to the Poorest Regions of the World Fact: Power politics has been most important Historical Trend (Hist. Chart 1) Asia s share--down Africa share--has always been small, but will increase in the future Africa s problems increasingly threaten DC s security Middle East s share, up after Camp David Agreement Myth #2: Most Foreign Aid Goes to the Poorest LDCs Fact: Poverty is not a primary rational for US aid (Figure) Top 10 Countries, excluding military & multilateral (2004) Iraq $ 18.4 billion Israel $ 2.6 billion Egypt $ 1.87 billion Afghanistan $ 1.77 billion Colombia $ 0.57 billion Why these countries? Jordan $ 0.56 billion Pakistan $ 0.39 billion Liberia $ 0.21 billion Peru $ 0.17 billion Ethiopia $ 0.16 billion 21 Myth #3: Most Foreign Aid Is For Development Projects & Food Aid Fact: Most AID $ have been spent on military assistance & Economic/Political Security (Hist. Chart 2) Foreign Aid (2004) by Type ($ 20.7 billion) Bilateral Development 30.1% Military 23.2% Economic/Political Security 26.1% Humanitarian 12.3% Multilateral Development 8.2% 22 11

Myth #4: The US is Very Generous (Cartoon) Fact: The U.S. is far less generous today than in earlier years. The U.S. is far less generous than other DCs 1. US Foreign aid (ODA) has declined (in real $ and as % of GDP) o Peak: 3.2% of GDP (Marshall Plan) (Hist. Fig.) o 2002 (Figure) 0.15% of GDP Less than $50 per US citizen Lowest share since WWII Perspective--Compare to other expenditures (1998) o Military budget $ 272 billion o Cosmetics/beauty $ 53 billion o Soft drinks $ 25 billion o Tobacco $ 36 billion o Alcohol $ 31 billion o Greeting cards $ 8 billion o Pet food $ 7 billion 23 2. All OECD countries (2002) give higher percent of their GNI (exc. military) US is the largest donor nation, but 30 year ago the UN/DCs set 0.7% of their GNI as a target for ODA ~Denmark 0.96% ~ France 0.38% ~ Norway 0.89% ~ Finland 0.35% ~ Sweden 0.83% ~ Switzerland 0.32% (Figure) ~ Netherlands 0.81% ~ UK 0.31% ~ Belgium 0.43% ~ Canada 0.28% ~ Ireland 0.40% ~ U.S. 0.13% 3. The EU gives 3 times (2003) as much foreign aid as the US, but the US s GDP is 27% greater than the EU s GDP (Figure) ~ U.S. $16.3 billion ~ EU $47,2 billion 4. The EU has committed to increasing its foreign aid to $80 billion by 2010 24 12

Myth #5: The US Spend Much of the Federal Budget on Foreign AID Fact: The US spends less than 1% (0.9) of federal budget on Aid Note: Most Americans polled: o Thought the US spent 20% of the federal budget on foreign aid o Felt that 10% was about right! Myth #6: Most Foreign Aid Dollars are Spent in LDCs. Fact: 80% of AID $ are spent in the US or go to US citizens for: o Purchasing US equipment, food, other goods o Salaries & living expenses of American "experts", consultants 25 US Resource Flows to the Developing World in 2000 ($70.5 billion) U.S. Private Flows to the Developing World (FDI and Net Cap. Mkts.) 39% U.S. Government Official Development Assistance (Part 1) 14% Personal Remittances from U.S. to Developing World 25% U.S. Government Other Country Assistance (Israel, Russia, etc.) U.S. Foundation (Part II) Giving Abroad 4% U.S. Corp 2% and Corp. Foundation Giving Abroad 4% U.S. NGO (PVOs) Grants Abroad 5% U.S. Universities and Colleges For. Student Scholarships 2% U.S.-based Religious Organizations 5% Go to p. 3 26 13

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Percent 3.50 3.25 3.00 2.75 2.50 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 Foreign AID Trends, 1962-2002 (2003 dollars) 1962 1964 1966 1968 1970 1972 1974 1976 1978 1080 1982 1984 1986 1988 1990 1991 1994 1996 1998 2000 2002 Percent of GDP Percent of Federal Budget Go to p. 23 43 Go to p. 24 44 22

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